The Stock Market
The exchange of security trading that is performed by professional stockbrokers is known as the stock market, or the equity market. These are stock traders looking towards gains from short-term price unpredictability. Trades can last from several seconds to several weeks.
In other words, a stock market or equity market is an entity of economic transactions, belonging to the public. Its main goal is to trade company stocks or shares at fixed prices. Then there is the stock exchange, which lists these shares, also known as securities, in addition to the stocks that are traded privately. Stock exchanges serve the purpose of listing and trading stocks, and are used by both buyers and sellers. Companies or organizations mutually list their stocks through these stock exchanges.
The New York Stock Exchange (NYSE) in New York is the largest stock market in the United States, and the Toronto Stock Exchange is the largest in Canada. Europe features numerous stock exchanges, but a few of the major stock exchanges include the London Stock Exchange, the Amsterdam Stock Exchange, the Paris Bourse, and the Deutsche Borse, also known as the Frankfurt Stock Exchange. In Africa, the largest stock markets include the JSE Limited and the Nigerian Stock Exchange, and in Asia, the largest stock markets are the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Bombay Stock Exchange, and the Shanghai Stock Exchange.
Currently, the stock market’s buyers and sellers are mostly institutions. However, a look back in history shows that these buyers and sellers were actually individual investors including affluent businessmen whose families were involved with specific corporations for years. Stock markets developed a more institutionalized profile and the trades mainly revolve around pension funds, mutual funds, exchange-traded funds, hedge funds, insurance companies, investor groups, and banks.
Stocks are bought and sold by traders, who work professionally in a financial institution or corporation, or who are individual investors. Traders buy and sell stocks, bonds, and/or commodities traded in the stock markets that make up the stock exchange. Traders should not be confused with brokers, who are simply responsible for giving directions to the traders in terms of buying or selling orders.
In the world of finance, traders can be divided into several different groups: stock traders, day traders, pattern day traders, floor traders, high-frequency traders, and rogue traders. Each category of traders relates to individuals responsible for trade within the stock market, but each group deals with a specific kind of trade.
It is important for traders to be authentic, since they account for major responsibilities in finance. Each trader is required to have a broker’s license as a form of validity and authenticity. This license is issued by the Financial Services Board (FSB), under the Financial Advisory and Intermediary Services (FAIS) act, which the traders must register under in order to trade the funds of their clients. Individual investors are not required to register; however, all traders are evaluated to determine their level of services, education, and advice.
Fairly recent Uniform Margin Requirements are the results of several stock market crashes that took place in 1929, 1987, and 2000, and require stock brokers to be checked for accuracy. These additional steps help ensure effectiveness and efficiency. Included in these Requirements are mechanisms that improve accuracy and productivity, such as the circuit breaker mechanism, which automatically pauses trading for a temporary amount of time if the stock drastically falls during the day.
There are two main types of stock exchanges: the physical and the virtual. Physical stock exchanges are known as open outcry, and take place on a trading floor. These stocks are auctions in which traders take part in an unlimited number of bids and offers. Virtual stock exchanges take place over a network of computers. Stocks that are part of a virtual stock exchange consist of trades that are traded electronically by designated traders.
So what exactly is the purpose and function of the stock market?
The stock market is mainly used by companies to raise money. This way, businesses can be traded publicly, or company shares could be sold in the public market to bring in financial capital. In the stock market, securities could be sold quickly and easily due to their liquidity. Liquidity refers to converting an asset or security quickly to cash on the market without affecting its value. Investing in stocks is more beneficial than investing in say, real estate, which has less liquidity.
Today, the stock market is correlated with the modern financial system through means such as disinter-mediation. Through this feature, a portion of the funds that are part of savings or financing travel directly to their destined financial markets as opposed to bouncing back and going through the bank lending and deposit operations routes. The stock market has seen a huge interest in investing, both via direct methods or through mutual funds. This serves as one of the most significant realms of the financial system.
The stock market’s nature accounts for huge excitability in the financial world. The stock market features trends, which refers to the prices of shares that may jump up or down drastically and often. Investors may offer prices that steer away from these trends. Trends that are positive or up are known as bull markets, while trends that are negative or down are known as bear markets.
The state of financial markets is often debated by economists who question whether these markets are efficient. This is the result of overreactions – excessive euphoria may heighten prices while excessive pessimism may lower them significantly. The involvement in stock markets invites group thinking and gambling to the picture. Group thinking steers individuals away from objective assessments, causing them to think alike and not differently as the rest of the group. Many individuals, including those involved in stock trading, alter their opinions based on the opinions of other individuals thinking that this leads to more valid and worthy choices.
Then, there is gambling, which is the activity that the stock market adheres to. The outcome is easily predictable, although it may be altered along the way when group thinking becomes involved. However, from time to time, the stock market transforms to a game of poker. Under this interpretation, the stock market puts on a different face which involves the use of psychology to determine the choices of investors. Those who participate in this game must predict the reactions of the other participants, or in this case, of the investors.
At times, the stock market may irrationally reflect current economic or financial news, despite the fact that this news does not directly affects the value of securities. This may lead to counter-reactions if this news is either better or worse than was initially expected. Press releases, rumors, and euphoria may cause the stock market to bounce in different directions, even despite anticipation of such factors. Experienced investors, such as those involved in hedge funds, often make a quick effort to use these temporary jumps to their advantage.
Just like any other business, the stock market is difficult to get a hang of if you are an amateur or inexperienced investor. However, you can be granted necessary support and assistance from experienced investors, from books or from numerous online sources.
Stock Market Indices
The Stock Market Indices are commonly classified into groups of stocks by their region, by the exchange they trade on, or by other types of classification. This page sums up the performance of these major stock groups, and is often used by investors to determine the outcomes of stocks.
The financial sections of many newspapers feature lists of many major market indices. Each of these indices outlines the performance of a specific group of stocks that represent a market of the U.S. stock market or of the economy. Information on these indices can be found on the websites of their sponsors as well as of the funds that track them.
Some of the major market indices include the following:
Dow Jones Industrial Average (DJIA)
The Dow Jones Industrial Average lists 30 “blue chip” stocks of industrial companies in the U.S. Included in this index are companies that once featured huge investor interest and grew successfully in their time. The companies that are part of this list are financial services companies, computer companies and retail companies. No transportation or utility companies are included in this list. The stocks that are part of the DJIA often remain unchanged.
NYSE Composite Index
The NYSE Composite Index contains a list of common stocks from the New York Stock Exchange. It is used to observe the price movements of these stocks. This Index is known to be capitalization-weighted meaning that each stock listed in this Index contains a weight that is parallel to the capitalization of the stock market.
The NASDAQ-100 Index outlines the performance of the 100 largest and most actively traded securities based on market capitalization, listed on the NASDAQ Stock Market. This “modified capitalization-weighted” index includes non-financial domestic and international securities alike. The requirements for a stock to be listed as part of this Index include a daily minimum average trading volume of 100,000 shares. The securities listed on this Index must also have traded previously on NASDAQ or have been listed on any other major stock exchange.
Dow Jones Industrial Average Index (DJIA:DJI)
Almost all stock markets or sectors of the economy have indices. Investors are typically familiar with these indices through exchange-traded funds and index funds. Such funds are used to track specific indexes as part of their investment objectives.
The Over-the-Counter, or the OTC market is an alternate derivatives market used for the trading of non-standard products with less structure that cannot be included on the stock exchange. In the OTC market, products are traded via exchanges and the trading takes place in a network of dealers, or middlemen. These dealers are responsible for the inventories of securities and deal directly with the buying and selling of them, as opposed to the brokers of major stock exchanges who give traders directions. The OTC market is a decentralized market of securities not otherwise listed on any other stock exchange. Buying and selling is performed over the telephone, facsimile, or electronic networks rather than on a trading floor. This type of market does not feature a central exchange or meeting place.
Many OTC equity securities are part of The OTC Bulletin Board (OTCBB) available in the U.S. for broker-dealers. This is an inter-dealer electronic quotation system and lists quotes, prices, and volumes of many OTC stocks. Individuals of the OTC system can make use of the OTCBB to find current quotes or last sale prices of OTC stocks not listed on the NASDAQ stock exchange or on any other national securities exchange.
There is also the Pink Sheets, a daily publication compiled by the National Quotation Bureau, providing service to the OTC markets of the U.S. The information it lists relates to quotations and trading of these OTC stocks. This publication uses a system of categorization outlining the levels of financial and corporate disclosure as determined by the institutions that benefit from this quotation system. This system of categorization warns investors who are considering investing in these companies. The information they receive from Pink Sheets does not portray the quality or merit of securities but is rather based on the timeliness and level of the disclosure of each company and may include companies that are questionable or speculative.
In the U.S., it is the market makers who carry out OTC trading. These market makers use inter-dealer quotation services such as the OTCBB. Stock exchanges do not list OTC stocks and these stocks are not traded on stock exchanges either. However, stocks listed on the exchange could be traded over-the-counter on third markets. The U.S. Securities and Exchange Commission (SEC) lists the requirements that stocks listed on the OTCBB must comply with. Stocks that are part of Pink Sheets, do not have any requirements listed by the SEC, but other stocks must meet the guidelines of OTC Markets.